Business Acquisitions | Note 3. Business Acquisitions Acquisition of Pace On January 4, 2016, ARRIS completed the acquisition of Pace, a leading international technology solutions provider, for approximately $2,074 million, including $638.8 million in cash and issuance of 47.7 million shares of ARRIS International plc (formerly ARRIS International Limited) (“New ARRIS”) ordinary shares and $0.3 million of non-cash consideration. In connection with the Combination, (i) ARRIS, a company incorporated in England and Wales and wholly-owned subsidiary of ARRIS Group, agreed to acquire all of the outstanding ordinary shares of Pace by means of court-sanctioned scheme of arrangement (the “Scheme”) under English law and (ii) ARRIS Group entered into a Merger Agreement (the “Merger Agreement”), dated April 22, 2015, among ARRIS Group, ARRIS, ARRIS US Holdings, Inc. (formerly Archie U.S. Holdings LLC), a Delaware corporation and wholly-owned subsidiary of ARRIS (“US Holdco”) and Archie U.S. Merger LLC, a Delaware limited liability company and wholly-owned subsidiary of US Holdco (“Merger Sub”), whereby Merger Sub would be merged with and into ARRIS Group, with ARRIS Group surviving as an indirect wholly-owned subsidiary of ARRIS. The Combination combines the strengths of both companies on a global scale—broadening ARRIS’s worldwide CPE leadership with a competitive stake in satellite communications; and expanding its cable pay TV, cloud, network, home, and services portfolio. The estimated goodwill of $1,066.2 million arising from the acquisition is attributable to the workforce of the acquired business, strategic opportunities and synergies that are expected to arise from the acquisition of Pace. Goodwill has been preliminarily assigned to our reporting units as of September 30, 2016. The Company will finalize the allocations in the fourth quarter of 2016, prior to the close of the measurement period. Goodwill is not expected to be deductible for income tax purposes. The following table summarizes the fair value of consideration transferred for Pace (in thousands): Cash Consideration (1) $ 638,789 Stock Consideration (2) 1,434,690 Non-cash Consideration (3) 323 Total consideration transferred $ 2,073,802 (1) Cash consideration represents the cash payment of 132.5 pence (converted to $1.95 at an exchange rate of 1.4707 as of January 4, 2016) for each of Pace’s shares and equity awards outstanding. (2) Stock consideration represents the conversion of each of Pace’s shares and equity awards outstanding at a conversion rate of 0.1455 with a value of $30.08 at January 4, 2016, which represents the opening price of the Company’s shares at the date of Combination. (3) Non-cash consideration represents $0.3 million settlement of preexisting payables and receivables between Pace and ARRIS. The following is a summary of the preliminary estimated fair values of the net assets acquired (in thousands): Amounts Recognized as of Acquisition Date (a) Adjustments Amounts Recognized as of Acquisition Date (as adjusted) Total estimated consideration transferred $ 2,073,802 $ — $ 2,073,802 Cash and cash equivalents 298,671 — 298,671 Accounts and other receivables 481,176 — 481,176 Inventories 426,871 771 427,642 Prepaids 38,197 108 38,305 Other current assets 53,618 (516 ) 53,102 Property, plant & equipment 71,816 1,081 72,897 Intangible assets 1,324,800 (64,440 ) 1,260,360 Noncurrent deferred income tax assets 74,171 (5,876 ) 68,295 Other assets 7,112 (7 ) 7,105 Accounts payable and other current liabilities (800,538 ) 7,896 (792,642 ) Deferred revenue (4,805 ) — (4,805 ) Short-term borrowings (263,795 ) — (263,795 ) Other accrued liabilities (122,919 ) (14,759 ) (137,678 ) Noncurrent deferred income tax liabilities (465,166 ) 46,342 (418,824 ) Other noncurrent liabilities (99,422 ) 17,171 (82,251 ) Net assets acquired 1,019,787 (12,229 ) 1,007,558 Goodwill $ 1,054,015 $ 12,229 $ 1,066,244 (a) As previously reported as of March 31, 2016 As a result of measurement period changes for intangible assets, the impact to previously recorded amortization for the first and second quarters of 2016 was an increase of $4.6 million and a decrease of $8.4 million, respectively. Additionally, we recorded a decrease to the provisional fair value of warranty obligations, resulting in a decrease of previously recorded warranty expense of approximately $0.7 million for the first and second quarter of 2016, respectively. These adjustments have been recorded prospectively in the third quarter of 2016. The Combination is being accounted for using the acquisition method of accounting in accordance with the guidance in ASC 805, Business Combinations The $1,260.4 million of acquired intangible assets are as follows (in thousands): Estimated Fair value Estimated Weighted Customer contracts and relationships $ 635,200 9.8 Technology and patents 539,960 6.0 In-process research and development 6,400 indefinite Trademarks and tradenames 62,400 3.0 Backlog 16,400 0.5 Total estimated preliminary fair value of intangible assets $ 1,260,360 The fair value of trade accounts receivable is $452.3 million with the gross contractual amount being $454.3 million. The Company expects $2.0 million to be uncollectible. The Company incurred acquisition related (adjustment) costs of $(0.2) million and $28.8 million during the three and nine months ended September 30, 2016, respectively. This amount was expensed by the Company as incurred and is included in the Consolidated Statement of Operations in the line item titled “Integration, acquisition and restructuring costs”. The Company also assumed $240.2 million of debt in conjunction with the Combination, and this debt was subsequently repaid in January 2016. With regard to revenue and earnings of Pace since the acquisition date, as of the third quarter of 2016 the Company has made significant progress in integrating the acquired Pace operations and have undergone a business transformation which impacts the ability to provide separate reporting for Pace. As a result, the Company believes that disclosure related to amounts of revenues and earnings of Pace since the acquisition date is now impractical. The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of Pace occurred on January 1, 2015, the beginning of the annual period. The pro forma adjustments primarily relate to the additional depreciation expense on property, plant and equipment and amortization of acquired intangibles assets, interest expense related to new financing arrangements and the estimated impact on the Company’s income tax provision. The unaudited pro forma combined results of operations are provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results. Unaudited pro forma net income (loss) for the three and nine months ended September 30, 2016 and 2015 was adjusted to include (exclude) certain acquisition-related nonrecurring adjustments, including income tax related to stock transfer, retention bonus, executive severances, acceleration of restricted stock, acquisition related costs, and fair value adjustments to acquisition date inventory, deferred revenue and deferred costs. These adjustments in the aggregate were ($0.2) million and ($6.5) million for the three months ended September 30, 2016 and 2015, respectively, and ($146.5) million and $193.0 million for the nine months ended September 30, 2016 and 2015, respectively. These additional adjustments exclude the income tax impact. Three Months Ended Nine Months Ended September 30, (in thousands) 2016 2015 2016 2015 Net sales $ 1,725,145 $ 1,713,789 $ 5,069,895 $ 5,251,873 Net income (loss) attributable to ARRIS International plc 48,291 6,276 49,810 (86,593 ) Net income (loss) per share (1) Basic $ 0.25 $ 0.03 $ 0.26 $ (0.44 ) Diluted $ 0.25 $ 0.03 $ 0.26 $ (0.44 ) (1) Calculated based on net income (loss) attributable to shareowners of ARRIS International plc. These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. The operations of the acquired business were extensive and complex and the initial accounting for the business combination is incomplete at the end of the reporting period. Provisional amounts are reported for those items which are incomplete. At the time the financial statements were issued, the Company had not received a final valuation report from the independent valuation expert for acquired property, plant and equipment and intangible assets. In addition, the Company is still gathering information about income taxes and deferred income tax assets and liabilities, warranty obligations and other accrued liabilities based on facts that existed as of the date of the acquisition. During the measurement period, the Company will adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and ARRIS will record those adjustments to the financial statements. The Company will recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount are determined. ActiveVideo acquisition In April 2015, the Company and Charter Communications Inc. formed a venture, A-C Acquisition, LLC (“A-C Venture”) with ARRIS’s and Charter’s ownership percentage of the venture being 65% and 35%, respectively. On April 30, 2015, A-C Venture acquired 100% of the outstanding shares in ActiveVideo Networks, Inc. (“ActiveVideo”). The consideration for the acquisition was $98 million in cash. ActiveVideo, headquartered in San Jose, California, is a software company that uses cloud-based technology to bring advanced user interfaces and services to cable and IPTV set-top boxes, as well as connected consumer electronic devices. Goodwill arising from the acquisition is attributable to the workforce of the acquired business, future technology, future customer relationships, and strategic opportunities that are expected to arise from the acquisition. No tax deductible goodwill existed as of the acquisition date. Subsequent to the acquisition date, ActiveVideo converted to a limited liability company creating tax basis in goodwill essentially equal to its book basis. The total goodwill was assigned to the Company’s Cloud TV reporting unit, within the Company’s N&C reportable segment. |